VC investment in Europe plummeted to a two-year low in Q4’22, amidst an environment of high inflation, rising interest rates, the ongoing war in the Ukraine, and skyrocketing energy prices. Compared to recent quarters, the largest deals in Europe during Q4’22 were substantially smaller — although still sizeable and geographically diverse — led by 3 deals in the electric vehicle and mobility ecosystem - a $500 million raise by Sweden-based Einride, a $295 million raise by Sweden’s Volta Trucks and a $245.9 million rase by French battery producer Verkor.
VC investors in Europe prioritizing companies in their own portfolios
During Q4’22, VC investors across Europe showed increasing caution, putting a significant amount of pressure on their portfolio companies to cut costs and reduce their spend. While mature startups undertook the most publicised cost-cutting measures in Europe during the quarter, primarily major headcount reductions and reductions in real estate, the later part of Q4’22 saw a wave of smaller VC backed startups starting to follow suit.
Average Seed stage deal size in Europe grows significantly in 2022
Over the course of 2022, the average Seed stage deal size in Europe soared quite significantly as US investors found real value in European companies. US investors in the region typically invested larger amounts into deals than their European counterparts because of the comparatively low valuations of companies to be had in Europe. The declining value of the Euro against the US dollar also offered a unique opportunity for US investors to buy European companies at very reasonable prices.
Energy crisis creates VC market winners and losers
The ongoing energy crisis in Europe continued to put a major spotlight on companies operating in the renewable energy and energy storage spaces, spurring strong investment in a wide range of companies. In addition to the large raise by Verkor, Estonia-based renewable energy infrastructure company Sunly raised $196 million, Belgium-based hydrogen energy company Tree Energy Solutions raised $128 million, and Norway-based renewable energy financing company Empower New Energy raised $74 million.
Europe also saw significant investments in ESG and energy-adjacent businesses during Q4’22, including a $113 million raise by Norway-based Reetec—which manufactures minerals used in EV motors and wind turbines in an environmentally sustainable way.
After big drop in Q3’22, VC investment in the UK remains subdued
Investor sentiment in the UK remained subdued during Q4’22, driven both by global macroeconomic factors and by the uncertain domestic political situation experienced during the quarter. While many sectors saw VC investment plummet, the UK saw several pockets of strong activity, including sustainability, gaming, and health and biotech. A number of fintech subsectors also continued to attract from VC investors and corporates—including regtech, cybersecurity, and B2B solutions—while others, including BNPL, struggled. With BNPL regulations expected in the UK during 2023, the BNPL space could see smaller startups fail or be acquired by larger players over the next few quarters.
VC investment slows in Germany; B2C takes biggest hit
Germany saw VC investment slow considerably in Q4’22 as valuations dropped and more companies accepted flat rounds. The largest deal of the quarter was quite small compared to recent quarters: a $101.7 million raise by travel search engine platform company Holidu.
The B2C and D2C spaces in Germany felt enormous pressure in Q4’22, forced to juggle rising interest rates, high inflation, and declining demand. The B2B space faired much better among VC investors, with investment particularly focused on solutions aimed at helping companies digitize, become more efficient, or reduce costs. Fintech and energy were also strong areas of VC investment in Q4’22. With funding becoming harder to attract, some startups have started looking for strategic buyers, which could lead to more M&A activity in Q1’23. Longer term, Germany could see additional investment as corporates look to conduct more value creation domestically.
VC investment in Israel remains relatively quiet in Q4’22
VC investment in Israel remained relatively quiet in Q4’22 as a number of companies held down rounds or made serious efforts to cut headcount in order to reduce costs in order to appease their investors. Such cost-cutting was industry agnostic, with companies even in highly resilient sectors like cybersecurity making reductions. Some founders in Israel closed down companies entirely, returning funding to their investors in order to sustain their future credibility. M&A activity in Israel was almost dead in Q4’22; if this trend continues, there could be a major impact on the startup economy in Israel as it is quite reliant on new money coming in--particularly from US investors and corporates. Despite challenges, several industries will likely continue to see investment in Israel, including any solutions with military applications.
Ireland’s tech ecosystem remains strong despite some setbacks
VC investment in Ireland remained steady quarter-over-quarter, led by an $81.6 million raise by Tines, a $35 million raise by Carrick Therapeutics, and a $12.8 million raise by Vaultree. The country was not, however, immune to industry cost-cutting—particularly from large corporates looking to reduce headcount and their global real estate footprint. In Q4’22, Meta announced plans to reduce headcount in Ireland by approximately 350 as part of a global initiative, and plans to scale back its EMEA headquarters in Dublin.
Nordics region remains attractive to VC investors in Q4’22
The Nordics region continued to attract solid interest from VC investors in Q4’22 in terms on deal value, most prominently in the energy and electric vehicle space, despite a drop in total VC investment. In addition to Sweden’s Einride ($500 million) and Volta Trucks ($295 million), Norway-based food delivery platform Oda raised $151 million—although the latter was at a substantially lower valuation than the company’s previous funding round. Trends in the Nordics region are lagging a bit behind vs. for example the US. This could result in softer investment in Q1’23 as the VC market in the region sees more impact from the global downturn and the runways of the companies start to shorten.
Trends to watch for in Q1’23
Looking forward to Q1’23, VC investment in Europe is expected to remain relatively soft, with no end in sight to many of the challenging factors affecting the VC market. While many sectors will likely face challenges over the next quarter, VC investment will likely continue apace in high priority areas, including energy, energy security, and ESG. While interest over the near-term is expected to focus on energy independence and energy alternatives, interest in cleantech will likely accelerate as countries in the region work to meet their decarbonization targets.
Interest in lending solutions could also pick up as companies struggle to access cash and startups look for innovative options to avoid down rounds.
While VC investment has returned to the levels seen prior to 2021, the market itself hasn’t simply returned to the way it was in 2019 or 2020. Our geopolitical and economic circumstances have changed fundamentally and in an incredibly short period of time. Both companies and VC investors are working to understand what those shifts mean and how best to respond.
Investment drops again - to $12.9 billion invested on 1936 deals
VC invested in Series A remains remarkable strong
Corporate VC participation cools for 3rd consecutive quarter
Exits slide to record lows
VC Fundraising remains remarkably robust
Top 10 deals spread among 7 different countries